A firm has outstanding debt with a coupon rate of 6%,ten years maturity,and a price of $1000 per $1000 face value.What is the after-tax cost of debt if the marginal tax rate of the firm is 40%?

Question

Quizplus · Accepted Answer

The after-tax cost of debt is the cost of debt net of tax savings. The formula to calculate the after-tax cost of debt is:

After-tax cost of debt = Pre-tax cost of debt x (1 - Marginal tax rate)

Pre-tax cost of debt is the coupon rate, which is 6%. Marginal tax rate is given as 40%. 
Plugging these values in the formula, we get:

After-tax cost of debt = 6% x (1 - 0.40) = 3.6%

Therefore, the answer is C) 3.6%.

A Firm Has Outstanding Debt with a Coupon Rate of 6%,ten